Indonesia is the Place to Be Says Government

Australia must have some of the least astute businessmen if they cannot recognise the outstanding prospects of Indonesia. Alternatively, Australian business people are seeing something the politicians and bureaucrats are missing.

In addressing a business breakfast in Jakarta last week, newly installed Prime Minister Kevin Rudd extolled at length the economic virtues of Indonesia. The country seems to have ticked all the economic and financial boxes to display one of the consistently strongest growth paths in the world with ever closer ties to China and the rest of Asia helping it along.

Half the population of Indonesia is currently under 30 years old making up the world's third largest market for Facebook and, according to Australia's Tweeter-in-chief, making Jakarta the world's most active Twitter city. This is a sign of technological advancement, a youthful willingness to embrace new ideas and an international perspective.

After having experienced the rapid emergence of China in the past decade, there was more than a hint in the remarks of the Prime Minister that here was another chance for Australia to tap into an emerging economy on its doorstep to sustain its own prosperity.

Indonesia currently accounts for about 1.5% of global output, according to the International Monetary Fund. Since the peak of the financial crisis in1998, Indonesia has grown at a rate of 5% a year and, according to the most recent IMF forecasts, is set to remain on a 6.5% annual pace or thereabouts for the coming six years.

At the same time, its population growth has been running at 1.4% a year enabling improved living standards among the general population, although disparities in wealth remain as acute as they do in most of the world's developing economies.

Unlike at the turn of the century when government debt was around 100% of GDP, the debt to GDP ratio has just dropped below 25% and is set to go lower under currently foreseen economic outcomes.

The country is investing. Last year, capital spending accounted for 35% of Indonesia's GDP. With a saving rate of 33%, its capital needs can be sourced largely domestically. In short, it is in a strong position to improve living standards for its population.

There are some significant tensions. A culturally, linguistically and geographically fragmented population makes governing difficult. Indonesia's politicians are highly sensitive about the need to create a common national purpose and correspondingly nervous about threats to the unity of the young country prompting sometimes prickly relations with Australia, for example. That said, there has been a largely successful transition to democratically elected governments.

Against this background, the lack of Australian business interest in Indonesia is perplexing but, Bali aside, consistent with a general disconnect between the two countries. Although they might opt for Australia as students, few Indonesians see Australia as a place to visit. Fewer Australian students are learning Bahasa Indonesia today than 40 years ago.

There are parallels between Indonesia today and China in its earlier development phase. Today, China accounts for about 15% of global economic output but, in 1980, it made up only 2% and, despite its growth prospects, was failing to receive the attention it would eventually get.

By the early 1990s, as the growth of the Chinese economy became more widely understood, Australian businessmen, along with those from other countries, were pressured into coming up with China strategies. Some did this only reluctantly.

The prospect of every Chinese person buying a toothbrush or being given the chance to quench their thirst with a lager was enough to have sharp pencilled investment bankers and fund managers excitedly calculating the earnings explosion for successful toothbrush makers and brewers.

Despite China becoming a magnet for companies from around the world, the disappointment rate was high. The reasons were sometimes complex but three aspects of doing business stood out.

Firstly, the initial enthusiasm for China had come too early. Despite a dozen years of growth averaging near 10%, China did not yet have the critical mass to make a material difference to the world or individual companies. That would come some 10 years later.

Secondly, the profit margins available to foreign manufacturers were very slim by their domestic standards because their pricing power in China was nowhere near as strong as in their home markets. China became an important link in the globalisation of production but failed to realise initial expectations about its own market attractiveness.

Thirdly, the remnants of the old ways remained. Communist party officials competed with western managers for the attention of workers. Employees who had never experienced the freedom to exercise the type of workplace initiative western managers had come to rely on for getting the best from their businesses were reluctantly embraced. Corruption also hindered the success of the more morally squeamish foreign companies.

Even more recently, the China experience has been tough for many businessmen who have felt used by Chinese officials and entrepreneurs. Too often, foreign companies have been tapped for technology and experience by Chinese partners always planning on going it alone eventually. This reflects confidence about their potential place in the world as much as dishonesty.

Given such a backdrop and the associated unhappy experiences within the working lives of many current business people, the reticence of Australian companies to more speedily embrace the opportunities available in Indonesia is more understandable.

There is also the challenge of having to be in too many different places at once. A company that is likely to make a fist of doing business in Indonesia is probably one that is also engaged in China or Malaysia or one of the several other quickly growing parts of Asia. For many, another country in its economic infancy, no matter how much potential it might have, is simply too great a managerial stretch.

Mining is one of the industries, along with education services and food, through which the Australia-Indonesia connection could blossom. Indonesia's resource base and the proximity in Perth to a large proportion of the world's listed mining companies stand out as a potential bond.

Unfortunately, the experience of Australian mining companies in Indonesia has been mixed, at best. At worst, occasional horror stories about the standards and ethics among Indonesian business people have been a warning to stay well away.

Policy, too, has been difficult to cope with. Indonesia has aspired to raise the amount of domestic value added from mining. In pursuit of this aim, regulatory changes have been frequent and often difficult to follow.

Legislation now outlaws export licenses where advanced processing of ores has not occurred. And, yet, foreign companies continue to work with local partners to get temporary or special exemptions from the requirements written into the laws. These concessions, everyone is advised, are best sought quietly and without boasting in deference to local cultural preferences.

New entrants, confronted with considerable uncertainty about how even publicly stated policies will apply to them in the end, are drawn into a web of unfamiliar local intermediaries offering solutions to their commercial dilemmas.

Market signals tend to work. It is hard to believe that Australian business people would be looking a gift horse in the mouth, knowingly eschewing an involvement in Indonesia in the face of genuine business opportunities.

As China showed, fast growing GDP and a lot of people might excite a macroeconomist but are not enough on their own to make for a comfortable business experience.

(John Robertson is a director of E.I.M. Capital Managers, a Melbourne-based funds management group. He has worked as a policy economist, corporate business strategist and investment market professional for over 30 years after starting his career as a federal treasury economist in Canberra. His daily Market Diary - Brief Thoughts on Current Issues is available at http://www.eimcapital.com.au/PortfolioDirect/daily_views.htm).

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